The company in question is Imagination Technologies and, at the current price (IMG: 550p), the shares offer a further 13-16 per cent upside to my target range of 620p-640p - a re-rating I am confident will be achieved by the end of September. If you missed the article, it is available to read at Tech Calling.
The catalyst for my column was the sea change in investor sentiment following European Central Bank (ECB) president Mario Draghi's statement a fortnight ago that he would "do whatever it takes" to preserve the euro. That's significant, and it's my firm view that the ECB will now belatedly do what it should have done a long time ago and fire-fight the eurozone debt crisis by using its immense financial resources.
This will involve stabilising the sovereign debt markets of Italy and Spain by funding the purchase of those countries' bonds in the secondary market on such a scale that short sellers will be left running for cover. It would have the twin benefits of forcing up bond prices - and so lowering debt costs for any new debt issuance - and significantly reducing the mark-to-market losses financial institutions and banks are facing on their existing bond holdings.
This is not wishful thinking, either, as there is growing political backing for the so-called 'Draghi Plan' of "unlimited open-market operations" in the euro sovereign bond markets. The Finnish and Dutch are firmly onside, as is Germany's member on the ECB's executive board. Moreover, investors are clearly buying into the idea that the central bank's new priority is to mitigate the risk of a euro break-up at all costs. Moreover, we have time on our side for this big ECB bazooka to be launched, as Madrid is now funded through until October, so has no immediate financing needs.
That's the major reason why we've seen a rise in risk assets during August - and nowhere has this been more apparent than in the tech-laden Nasdaq 100 in the US, which formed a significant triple top breakout, at 2680, on its point-and-figure chart on 3 August. From my lens, it's well worth following since any decisive action by the ECB will at a stroke reduce the risk premium embedded in equity market valuations. It therefore makes sense to try to capitalise on the investor sentiment driving equities higher, which could realistically see the Nasdaq 100 making a new bull market high above 2795.
Tech that and rally
Clearly, buying a Nasdaq 100 tracker is one way to profit from the ongoing rally because in strong market moves it is almost without fail the tech sector that leads the charge. However, if you are happy to gear up your investment there are some attractive alternatives in the structured product market, including a Nasdaq 100 covered call warrant, RK28, issued by Royal Bank of Scotland. In my view, this offers the best value on a risk:reward basis over my six-week timeframe for this trade.
RK28 has an expiry date of 21 September 2012, an exercise price of 2600 and parity of 100:1. So, with the Nasdaq 100 futures trading at 2722 (11am BST on 13 August), RK28 is priced on a tight bid-offer spread of 95p-96p - the equivalent of 150 points on the index using the current exchange rate of £1:$1.566 - which means the index needs to rise to 2750 by expiry to cover the call warrant premium. It also means that an attractive 81 per cent, or 122 points of the call warrant price is 'in-the-money' and only 28 points is 'time value'.
Moreover, RK28 is geared 13.5 times to the underlying index, so we can use the warrant (http://ukmarkets.rbs.com) to leverage our capital and profit from the tech rally. To illustrate how this works, consider the following scenarios which assume the exchange rate and implied volatility of RK28 are unchanged at expiry on 21 September:
■ Nasdaq 100 rises 2.9 per cent to 2800 at expiry. RK28 has 200 points of intrinsic value which, at an exchange rate of £1:$1.566, means it's cash settled at 127.7p to give us a 33 per cent gain.
■ Nasdaq 100 is unchanged at 2722 at expiry. RK28 is cash settled at 78p and we make a loss of 19 per cent.
■ Nasdaq 100 falls 2 per cent to 2661, the chart breakout point. RK28 is cash settled at 39p and we make a loss of 59 per cent. It's worth noting that in the worst-case scenario of the index closing below 2600 at expiry, RK28 will be worthless.
Clearly, we can sell RK28 at any time (subject to normal dealing charges) during London market trading hours and don't need to wait until expiry to do so. I would rate this product medium to high risk, so it will not suit everyone. However, if I am right and the Nasdaq 100 gets a significant lift over the coming weeks, then the gains on RK28 could be substantial. I would place a stop-loss on the trade of a close below 2650.
